Mutual Daily Mutterings
Quote of the day…
“Of course I’ve seen Die Hard, Angus…I’m not an uncultured swine!” – Lachlan Rundell (13) in conversation with his older brother, Angus (15), about what was the best Christmas movie ever made.
Chart du jour… US CPI vs yields……
“In The Long Run We’re All Episodic and Non-Trending…”
- A quieter night in offshore markets as investors and traders alike continue to wrestle with the two broad themes driving risk sentiment. The evolving omicron COVID variant and how big of a problem it represents, and the Fed (and fellow central banks) and the path of their respective monetary policy setting. Specifically, the rate of tapering and the timing of the first-rate hike, and trajectory of hikes also. Personally, policy error here is probably the dominant risk to markets. CPI data out tonight in the US, which could provide some colour in this regard, and the FOMC meets next week.
- The narrative last night focused on the former with risk markets marginally softer – the S&P 500 snapping a three-day heater (aka rally), while bond yields fell a smidge and bull flattened…also a smidge. Reports have surfaced out of Japan that the new omicron variant is 4.2x more transmissible than Delta in its early stages. The UK has also guided its population to work from home where possible, which is forecast by some to cost the economy £2bn a month. Other government actions to combat the outbreak include restrictions on large gatherings and mask mandates. Doubts on whether current vaccines can be ‘easily’ tweaked to be effective against the omicron variant are also weighing in sentiment.
- Softening some of the sentiment impact from omicron headlines, US jobless claims hit their lowest level in fifty years….but “as full employment seemingly becomes a reality, the Fed will be forced to focus more on taming inflation, which has no doubt been an ongoing concern for investors.” Enter risk of policy error…
- Closer to home, geographically, Chinese property developer, Evergrande, officially defaulted on their USD debt – to date they have not been formally declared a ‘defaulter’, so a meaningful day in the context of this company. Broader markets hardly noticed despite the US$19.2bn in debt at risk. Kaisa, another Chinese developer, also defaulted after failing to repay a US$400m bond that matured yesterday. These two firms account for ~15% of US$ debt outstanding from Chinese developers. At this stage a government bailout looks unlikely.
The Long Story….
- Offshore Stocks – European markets opened up, but then drifted into the red as omicron concerns linger – which is expected, the white-coats are still pouring over the data to determine how bad it really is….”the prior day’s ebullience about the effectiveness of vaccines against Omicron has been partly overtaken again by concerns about the economic impact if renewed activity restrictions spread further, and what the balance of lesser severe illness versus increased transmission will mean for health system capacity” (NAB). US markets were mixed, but weighted to the downside. The DOW opened in the red quickly, but then rebounded into positive territory – mainly driven by Staples (+0.8%) and Health Care (+0.5%). In the end it closed flat. Meanwhile the S&P 500 (-0.7%) and NASDAQ (-1.7%) started in the red and stayed there for the day, with losses accelerating into the close. In the end, 70% of the S&P 500 closed lower, with only Healthcare (+0.2%) and Staples (+0.1%) putting up any fight, and it was insipid at best. Discretionary (-1.7%), REITS (-1.4%) and Tech (-1.0%) did all the damage on the downside.
- Local Stocks – a modest down day in local markets yesterday with the ASX 200 down -0.3%. Energy (-1.1%), Discretionary (-0.9%) and Tech (-0.9%) were the worst performers, yet it was Materials (-0.5%) that did most of the damage, accounting for a third of daily losses. Only two sectors really advanced by any measure of note, Utilities (+0.4%) and Healthcare (+0.2%). While the ASX 200 has advanced +2.2% over the past 7 days, the broader index remains stuck in no man’s land, with the current level, the 50 day and 100 day moving averages all within spitting distance of each other. Over the past two months the index has traded a reasonably tight 7200 – 7500 range, with no really evidence to suggest it’ll be able to break through on the high side any time soon. Futures are down a touch.
- Offshore Credit – a quiet day in offshore markets, with just two bonds in US$ IG space for a total of US$1bn priced. This took weekly issuance to a respectable US$38.5bn. Secondary spreads have improved over the prior session, mirroring strength in stocks, but then drifted a touch yesterday with the slightly softer risk sentiment.
- Local Credit – traders commentary…”A$ secondary credit remains in a tight range with spreads largely unchanged. It was two-way flow in financial paper (both senior and sub), corporates continue to face selling pressure and SSA’s remain better bid.” Major bank senior curve is steady, with the Aug-26 at +64 bps and the three-year part of the curve around +44 bps. Some movement in tier 2, reversing recent widening trends with the curve a basis point tighter. The 2026 callables are now ranging +141 – 144 bps, while the 2025’s are at +133 – 134 bps and the 2024’s at +102 bps. Buying within the private bank community was noted, with some selling by fundies.
- Bonds & Rates – local bonds bear steepened yesterday as markets continue to weigh the growth threat of the omicron variant with inflationary risks – and associated risk of policy error. On the moves witnessed yesterday, no change to the latter (3’s largely unchanged) and given the sell-off in the 10’s, one could surmise the market was reasonably comfortable with growth persisting despite the omicron risk …that was yesterday at least, it’ll likely swing around the other way today given US leads.
- Offshore Macro – US jobless claims out last night, 184K vs 220K consensus and 222K last print – the lowest level in five decades, further signs of an improving labour market. US inflation data out tonight with consensus at +0.7% MoM (vs +0.9% MoM last) and +6.8% YoY (vs +6.2% YoY last). If data prints at these levels, it will be the highest level of inflation since Ronald Reagan’s first term. President Biden has tried to soften the blow, saying Friday’s data won’t reflect recent declines in energy prices – prices at the pump have fallen -2.5% since the end of October.
- Local Macro – nothing of note today.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907